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What Asean can learn from the European union crisis

The Association of Southeast Asian Nations (Asean) and the European Union (EU) have very different social and economic characteristics. Based on GDP, the economic power of the EU is more than nine times that of Asean. The EU already started its integration in 1958, long before the Bangkok Declaration of Asean in 1967. Despite the differences, the current EU debt crisis may give Asean valuable lessons for the future.

The Euro zone crisis was triggered by many complex factors. Although economists might argue over the real cause of the crisis, there are at least three interrelated factors that Asean can take lessons from.

First is the disparity in economic competitiveness of member countries. It creates trade imbalances. Strong economies, such as Germany, have exports whose value is far exceeds their imports. At the same time, weak economies such as Portugal, Ireland, Italy, Greece and Spain (PIIGS) are in the opposite condition.

PIIGS export products have lost competitiveness in global market, forcing them to rely more on debts to finance their trade deficits. The euro, as a single currency, exacerbates the situation since PIIGS cannot independently devalue the currency to make their products cheaper.

Because of the persistence trade imbalances, weak countries accumulate debts until reaching the point where they cannot pay anymore. Their behavior is driven by the fact that the incentive to collect debts increases along with a decreasing interest rate after they joined the euro.

The second reason is lack of commitment from EU leaders. The 1992 Maastricht Treaty explicitly says that euro members must have a maximum 3 per cent of GDP in annual borrowing limits and 60 per cent debt-to-GDP ratio to ensure the stability of the Eurozone and prevent reckless fiscal behavior. Years later, everyone seems to forget they ever had such limits.

Needless to say that Greece ignored this restriction, resulting in a budget deficit of 12 per cent of GDP and 160 per cent debt-to-GDP ratio. Some media accused Greece of manipulating Maastricht rule by using complex derivatives and financial engineering. What bothers us are Germany and France, two biggest countries in the eurozone.

They also exceeded the minimum rules by making a 4 and 7 per cent budget deficit and 83 and 82 per cent debt-to-GDP ratio, respectively. It leads us to a perception that the EU leaders cannot maintain their own rules.

Last week, EU member countries, except the UK and Czech Republic, signed a landmark fiscal-compact treaty to improve previous agreements. They made the rules stricter, including granting the right to European Court of Justice to check whether countries implement budget rules properly and creating an automatic mechanism to force countries to correct their budgets. It remains to be proved whether they actually can implement the new rules consistently.

The third reason is the loss of confidence in all euro members. This factor is a common response to all the previous factors. Markets became anxious over whether the euro currency can be maintained and leaders are capable of containing the crisis. The interest-rate indicators show that euro countries have reached the highest point since the inception of the single currency, meaning the public does not have much faith in European economy.

Concern of a worsening crisis has loomed large since rating agencies responded to the crisis by reducing sovereign ratings of several weak countries to below investment grade or “junk” — although critics say that the rating agencies seemed to have been overreacting since they did not give a proper warning before the crisis exploded.

Asean is the most integrated regional organisation in the developing world. It may not take the EU as a role model for its economic development, but undeniably, the eurozone crisis can give an insight on how economic integration should be handled with care.

The main important lesson for Asean is that every economic integration should start with efforts to reach the same economic development in each member state. It is important to avoid the economic imbalance that happens in the eurozone. If Asean wants to deepen its integration, it must ensure all member states grow economically with the same pace and leave no country behind.

For now, economic imbalance among Asean member states may have little influence on Asean development. In Asean, trade with external partners is far more significant than intra-Asean trade, so member states seem more vulnerable to shock outside Asean rather than inside the region. But, in the future, this condition will evolve as Asean will be more integrated. Sustainable growth in a region can only be achieved if all member states are in the same stage of development.

Learning from the EU crisis, Asean should also create a mechanism to ensure fast and proper response when a crisis happens. The credibility for Asean is needed so that markets believe Asean can handle a crisis well.

Resisting globalisation is like defying the law of gravity. Economic integration is inevitable and trade agreements are necessary to make products competitive in the global market. But the more integrated countries, the more vulnerable they are to another’s internal problems. Asean, with the sense of community, should handle its integration care.